Morningstar

Best Buy: Market Pricing in Overly Optimistic Growth

While the new Best Buy 2020 plan emphasizes growth focused on multichannel capabilities, products and services that address customer needs, and accelerated Canada and Mexico expansion, these initiatives will not be enough to overcome longer-term structural issues.

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Best Buy Co Inc
(BBY)

Taking this together, we are not changing our $37 fair value estimate. Management's fiscal 2018 outlook for 1.5% revenue growth and low-single-digit operating income growth (flat revenue and operating profits excluding the benefit of a 53rd week) strikes us as appropriate given tepid demand trends, product availability issues, and Amazon's continued disruption. While we appreciate the new Best Buy 2020 plan emphasizing growth focused on multichannel capabilities, products and services that address customer needs, and accelerated Canada and Mexico expansion, we're concerned that these initiatives will not be enough to overcome longer-term structural issues. We view Best Buy as a solid capital-allocation play, evidenced by a 21% increase in its dividend to $1.36 annually and a new $3 billion share-repurchase program, but believe the market may be pricing in overly optimistic growth and operating margin assumptions--we expect operating margins to remain in the mid-4% range the next few years.

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About the Author

R.J. Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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